Loblaw shares considered overvalued, appetite for REIT questioned

Loblaw Cos.’ plans to create a REIT for its vast real estate portfolio is showing up in a too-high share price, says an analyst who put a sell rating on the company’s stock Wednesday.

Shares of the country’s largest grocery chain have risen about 20% since the retailer announced in December that it was going to spin off a majority of its real estate assets into a REIT and sell those units in an IPO later this year.

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Loblaw expects to retain a large majority interest in the REIT, about 80%, and it will be its own biggest tenant. That is a major problem, according to analyst Kevin Chu at Accountability Research Corp.

“We question the market’s appetite for a minority interest in a REIT that has an over-exposure to one tenant,” he said in a note to clients.

With Loblaw occupying about 83% of the 35 million square feet of real estate, the REIT would be over-exposed to Loblaw, Mr. Chu said. In such cases, the market normally responds with a discount, such as Granite REIT which has an overexposure to Magna.

“The reason for an over-exposure discount is to reflect the health of the tenant, and we perceive the health and outlook for Loblaw to be worse than that of Magna, for example.

“Despite the best efforts at financial engineering, we do not think that the value of Loblaw’s real estate can completely escape the overhang of the declining health and competitive landscape of the grocery business.”

Loblaw plans for the REIT to acquire assets that it estimates to have a market value of $7-billion. The retailer estimates its entire real estate portfolio is worth $9-billion to $10-billion.

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